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UK tax breaks spur £3B North Sea gas project

An oil platform is seen in the North Sea, around 100 miles east of Aberdeen, Scotland.
Andy Buchanan | Reuters
An oil platform is seen in the North Sea, around 100 miles east of Aberdeen, Scotland.
    • Danish energy group Maersk is to lead a £3 billion ($4.62 billion) project to develop the largest gasfield discovered in the U.K. North Sea for a decade, the first big investment to benefit from tax breaks announced in the Budget.

The Culzean field in the central region of the North Sea is expected to produce enough gas to meet 5 percent of U.K. demand when it reaches peak output in 2020-21, the company said on Monday. It is the largest gasfield to get the go-ahead for development since East Brae in 1990.

Maersk, JX Nippon and BP discovered the gas condensate field, which holds an estimated 250 million to 300 million barrels of oil equivalent in resources, in 2008. Production is due to start in 2019 and continue for at least 13 years, peaking at 60,000-90,000 boe per day.

"Culzean is an important development for the UK and also for Maersk Oil and our co-venturers," said Jakob Thomasen, chief executive of Maersk Oil.

The news is a rare boost for the U.K. North Sea, a high-cost region that is in long-term production decline and has been hit hard by the collapse in oil prices since last summer from more than $115 a barrel to just $50.

In an effort to breathe new life into the region, George Osborne, chancellor, announced a sharp cut in taxes worth £1.3 billion in March, a rescue package that included a cut in the headline supplementary rate of profits and a simplified investment allowance enabling companies to claim back the costs of new spending.

Mr Osborne said the announcement was "a clear signal that the North Sea is open for business".

Culzean is expected to support an estimated 6,000 jobs and create more than 400 jobs directly, according to Maersk.

The investment allowance, which will apply across the North Sea basin, has been set at 62.5 percent of such expenditure from April 1 and can be set off against profits subject to the supplementary tax rate. It supports the development of "high pressure, high temperature" projects such as Culzean, which tend to involve heavier capital expenditure.

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Last week, by contrast, Maersk said it would approach the U.K. Oil and Gas Authority to seek approval to cease production at its Janice installation, a decision that puts 200 jobs at risk. Output would cease in the second or third quarter of next year.

Output on the U.K. continental shelf, despite record investment in recent years, has been sliding since 2000. Oil & Gas UK.. says that it dropped another 1 percent last year to 1.42 million barrels of oil equivalent a day, versus a peak of 4.5 million boe/d 15 years ago. Exploration has all but ceased.

A fifth of production, or a third of fields, is now unprofitable, says the industry group. Cash losses, or the deficit after subtracting costs from revenues, topped £5 billion last year, the biggest shortfall since the 1970s.